The size of the sustainable finance market has risen considerably in recent years, surpassing a remarkable $1,6 trillion globally, as estimated by BloombergNEF. Climate Bonds' (https://www.climatebonds.net/about) latest market report shows recorded volumes of green, social sustainability, sustainability-linked, and transition, debt reaching $204.8 billion for Q1 2023, a 17% increase compared to the prior quarter. Green bonds accounted for the largest portion of the total sustainable debt at the end of Q1 2023, with recognised lifetime volumes, reaching $2.3 trillion.
Sustainable finance refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector. Environmental considerations might include climate change mitigation and the circular economy. Social considerations could refer to issues of inequality, inclusiveness. Meanwhile, investment giant https://www.blackrock.com/corporate/global-directory Blackrock defines "sustainable investing" as the practice of analysing a company's environmental, social and governance (ESG) risks, as well as assessing its opportunities and progress, using ESG data and fundamental insights, to inform the allocation of capital. Currently, ESG investing is reportedly "under attack" in the US as it meddles with less climate-sensitive policies; alternative labelling and AI purport to offer solutions according to https://www.axios.com/
What drives sustainable financing and Green Bonds?
On 14th January 2020, the EU Commission presented the EU Green Deal investment plan, aimed at driving at least €1 trillion of sustainable investments over the next decade. The ultimate objective was to engage all stakeholders in placing the environment at the top of their agenda.
The popularity of Green Bonds is driven primarily by investors embracing socially responsible investing, and not a better risk and return potential over conventional bonds, or the possibility of tax incentives. The idea of ?nancing renewable projects through Green Bonds "is even more important since institutional investors, in particular pension funds and asset managers, have been considering the possibility of including sustainable environmental investments in their assets". As such, "sustainable investing" in 2021, accounted for more than one quarter of total assets under management (AUM) in the United States and more than half in Europe.
According to Ms. Irene Terzidou at the 25th National Energy Summit in Athens in 2021, 30% of the EU's €800 billion Covid-19 recovery scheme called NextGenerationEU, will be raised through the issue of Green Bonds. The proceeds will be used to finance green investments and reforms. In October 2021, the EC issued the first NextGenerationEU Green Bond worth €12 billion, the world's largest Green Bond to date!
According to Sean Kidney the CEO of Climate Bonds Initiative at the Athens Conference on Green Financing Opportunities in SE Europe, in April 2023, Greece and Cyprus "are some of the best places in the world for solar power projects". The development of green projects propels the surging demand for sustainable financing.
How is transition financing relevant?
Transition financing refers to financing private investments to reduce today's high greenhouse gas emissions and transition to a climate neutral and sustainable economy. On 13 June 2023, the Commission issued non-binding recommendations on how non-financial and financial companies can voluntarily use EU sustainable finance tools to seek or provide transition finance. A good example are investments into green production methods or reducing the environmental footprint as far as possible, where no green technologies are yet available. Transition finance is urgently needed to reduce greenhouse gas emissions by 55% and our environmental impacts by 2030.
Blue Financing: Is the colour relevant?
Blue finance is an emerging area in climate finance with increased interest from investors, financial institutions, and issuers globally. It offers tremendous opportunities to help safeguard our access to clean water, protect underwater environments and invest in a sustainable water economy. Specifically, Blue Bonds and Blue Loans are innovative financing instruments that raise and earmark funds for investments such as water and wastewater management, reducing ocean plastic pollution, marine ecosystem restoration, sustainable shipping, eco-friendly tourism, or offshore renewable energy. It is worth noting that IFC a member of the World Bank and the largest global development institution focused on the private sector in developing countries, actively supports Blue Finance through issue of "blue bonds" and similar financial instruments, with a view to advancing economic development and the lives of people in developing countries through a boost of the private financial sector.
As recently as earlier this month, Morgan Lewis has announced their advice to Bank of America in debt financing for nature, with the offering of $500 million of "blue bonds" for the purpose of refinancing sovereign debt of the Republic of Gabon and generating funds for biodiversity protection and nature-based resilience in Gabon's national protected marine areas.
- Is there an EU standard on what constitutes an eligible Green Bond?
Yes, since 28th February 2023, it was agreed that the EU will create a voluntary European Green Bond Standard (EUGBS), available to those private or public entities that wish to raise funds on capital markets and finance their green investments. Issuers of the EUGBS will need to ensure at least 85% of the funds raised are allocated to economic activities aligning with the Taxonomy Regulation.
- What's Greenwashing and how is it relevant?
Greenwashing is a term used to describe a false, misleading action made by an organization about the positive impact that a company, product or service has on the environment. In June 2023, ads by Shell, Repsol and Petronas were found misleading the public on the climate benefits of their products, so they were banned. Asset managers worry.
- Who can issue Green Bonds?
Green Bonds can be issued by public or private companies provided their by-laws allow. Sovereign bonds are also being issued. In fact, Cyprus proudly issued its first Green Bond on 4th April 2023. The Cypriot Sustainable 10-year Bond raised a whopping EUR 1bn with a yield of 4.219%.
- Are there benefits in having Green Bonds certified?
Yes. Certification is a form of endorsement of the green credentials of the asset or project they certify. Additionally, they increase visibility to investors, and demonstrate that the bonds meet the requisite standards for climate integrity. Certification also provides a safeguard against Greenwashing and assist issuers with building a reputation while offering credibility, as they're science-based criteria to certification.
- What authority regulates Green Bonds?
The European Securities and Markets Authority ("ESMA") and at Cyprus level, by the Cyprus Securities and Exchange Commission that has published a paper on key terms of sustainable finance (https://www.cysec.gov.cy/en-GB/cysec/sustainable-finance/).
- How can Solsidus Law assist with the issue of Green Bonds?
Our legal services are multi-level, addressing the complexity of issuing such specialised financial instruments. Our competitive advantage is our strong network of contacts in the Sustainability Finance sector, and our extensive experience in the vanilla bond issue. The fact we're already representing the development of certified green projects, also helps.
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